According to data from Oriel Securities, there are currently 31 equity portfolios in the AIC Investment Companies universe that are yielding more than 4 per cent.
These include the City of London Investment Trust, which primarily invests in UK blue chip companies and has a yield of 4.7 per cent. Schroder Income Growth has a 5.5 per cent yield and is trading on a 5 per cent discount.
Edinburgh Investment Trust, which has a yield of 4.6 per cent, is managed by Neil Woodford and has a defensive bias that has aided relative performance in recent months.
Eleven of the 31 trusts identified by Oriel are yielding more than 5 per cent, while four are paying out more than 6 per cent.
European Assets Trust – yield of 7.4%
The £108m portfolio, which is under the guidance of F&C Management Limited, is the highest-yielding equity trust in the entire AIC universe. Its board resets the rate of dividend annually.
It invests principally in European small cap companies and uses the HSBC Smaller European Companies (ex UK) index as its benchmark.
While the portfolio is likely to be appealing to investors looking for a high level of income, its yield has come at a price; according to FE data, it has underperformed its benchmark over five and 10 years by some distance.
Over the last decade, it has returned 92.87 per cent compared with 145.3 per cent from the index, while over five years it has lost 8.79 per cent more than its benchmark.
Performance of trust vs index over 10-yrs
Source: FE Analytics
When any portfolio has a principal focus on maintaining a high income, the manager is obliged to back high dividend-paying companies over their high-growth counterparts, which can have a significant impact on relative performance – particularly in up-markets.
That said, European Assets has a strong record over three years, returning 36.75 per cent compared with 19.31 per cent from its benchmark.
Sam Cosh took over as lead manager of the trust back in November 2011, following the departure of Paras Anand after a short stint. Crispin Longden was the longstanding manager of the portfolio, taking the reins from December 2002 until April 2010.
The trust has a total expense ratio (TER) of 1.64 per cent and is currently trading on a discount of 9.8 per cent.
Shires Income – 6.6%
Aberdeen Asset Management’s Shires Income trust, which has been headed up by Ed Beal since April 2008, is a UK-focused equity portfolio invested predominantly in FTSE 100 stocks, although it can hold some of its assets in preference shares and collective funds.
The Aberdeen Smaller Companies High Income trust, for example, is Beal’s biggest position at the moment, making up 6.6 per cent of the portfolio.
Similar to European Assets, the trust’s total return lags its benchmark – in this case the FTSE All Share – over five and 10 years, but it has done much better over three.
The turnaround in performance has coincided with Beal’s appointment; over three years it has returned 75.68 per cent, outperforming its sector average and benchmark by 28.64 and 37.46 per cent respectively.
Performance of trust vs sector and benchmark over 3-yrs
Source: FE Analytics
By contrast, over 10 years it has returned only 16.87 per cent, compared with the FTSE All Share’s 76.92 per cent.
Beal has a big overweight in financials, with this sector making up 47 per cent of the portfolio.
The trust has a TER of 1.1 per cent and is currently on a discount of 3.3 per cent. The average UK Growth & Income trust is on a slight premium. Prior to Beal’s appointment, the trust was headed up by Iain Lynn for 16 years.
Merchants Trust – 6.5%
The £532m Merchants Trust, which is headed up by Simon Gergel of RCM, prides itself on being a low-risk UK equity income portfolio.
It invests predominantly in high-yielding large cap UK equities and has limited positions in cyclical natural resources and industrial businesses. Instead, Gergel opts for less economically sensitive sectors such as food producers, telecommunications and utilities, which tend to have a higher yield.
GlaxoSmithKline, Shell and HSBC are currently the manager’s three biggest holdings, with a combined weighting of 21.5 per cent.
Once again, its aversion to cyclical stocks means it tends to lag the market in up-periods. According to FE data, it has marginally underperformed its FTSE 100 benchmark over five- and 10-year periods, but has a better record than the index over three years.
Performance of trust vs sector and index
| Name | 1-yr (%) | 3-yrs (%) | 5-yrs (%) | 10-yrs (%) |
| FTSE 100 | -2.14 | 36.77 | -0.66 | 69.33 |
| IT UK Growth & Income | -1.45 | 47.04 | -15.18 | 62.82 |
| Merchants IT | -9.31 | 47.94 | -6.16 | N/A |
Source: FE Analytics
It only has a TER of 0.65 per cent, making it significantly cheaper than European Assets and Shires Income. Gergel has headed up the portfolio since April 2006.
Most of these higher-yielding trusts continue to trade at close to NAV, with some of them on premiums, which partly reflects the ongoing demand for income. In spite of relatively weak performance in the last 12 months, Merchants is on a 4 per cent premium.
"We think that some of these premium-rated funds are vulnerable to a premium de-rating," warned Oriel's Iain Scouller.
Oriel's study excluded trusts with multiple share structures and a market cap of less than £50m assets under management (AUM).